Economic uncertainty, hyper-competition could accelerate rise of low cost IT

Economic fluctuations and business uncertainty, accelerated service globalization, and increasing competition of IT services are major factors that could force businesses to move further toward low cost IT, according to Gartner, Inc.

Gartner defines low-cost IT as the delivery of managed IT services (infrastructure, application, business process services) designed and implemented to minimize IT price — per user/unit per month (PUPM) — while maximizing the number of client organizations and users that adopt the services.

“The price of IT will continue to drive decision making,” said Claudio Da Rold, vice president and distinguished analyst at Gartner. “As credit markets in the US and Europe remain challenging, end-user organizations are reducing costs by sourcing IT services from emerging countries and lower cost providers. Cost cutting, restructuring and the move toward offshore outsourcing continue to increase while growth in emerging countries accelerates, widening the gap between high-growth areas (includes Asia/Pacific, Brazil, Russia, India and China) and stagnant economies (includes Europe, Japan and North America), and low and high-cost IT providers. This trend could drive a prolonged reduction in the unit cost of IT services, significantly affecting the IT services market by 2013.”

The ‘industrialization of IT services’ (defined as the standardization of IT services through predesigned and preconfigured solutions that are highly automated and repeatable, scalable and reliable, and meet the needs of many organizations) is also enabling a greater orientation toward outcome-based and pay-per-use services. Early offerings like infrastructure utilities or cloud e-mail show that providers can deliver one-to-many services at price points that are one third of in-house/traditional costs, due to the right combination of industrialized one-to-many services, offshore outsourcing and technologies such as virtualization and automation.

Gartner analysts said that based on the proliferation of advertising ‘IT as a service’ as a pricing model, business buyers would force traditional providers to switch to PUPM pricing models by 2012.

“If the scenario of low-cost IT accelerates in the next few years, we foresee a growing number of delivery models that could cut the cost of IT by a third or more. This could lead to the emergence of viable low-cost IT providers,” said Frank Ridder, research vice president at Gartner.

In such a scenario, the IT services market could sustain a year-on-year reduction of 10 percent to 25 percent in the average market unit price PUPM for three to five years. A yearly reduction of 10 percent to 25 percent in IT services costs, affecting 30 percent of the market, could cause the overall, average market price to decline by 5 percent to 10 percent yearly. This worst case scenario reduction would equal the revenue of two to four of the largest IT service providers. “This reduction is possible because, in 2009, we saw the IT services market shrink 4 percent, with a market loss of US $42 billion, with outsourcing prices plummeting,” said Ridder. “Such extensive reductions in price and market size would stall growth in the overall IT services market by 2013.”

“Organizations must invest in scenario planning and risk management,” added Da Rold. “About two or three times a year — depending on dynamics in their business environment — they need to assess their multi-sourcing environment against risks, including changing service pricing, regulatory changes and providers’ viability. They also need to consider leveraging new IT services options depending on their compatibility with their corporate risk profile, and add business value through risk mitigation and business continuity planning.”

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